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Dismal Failure of the Dismal Science

The sky is falling! The sky is falling! So said Chicken Little in a fit of uninformed self-preservation. We are now hearing about the great failures of capitalism from the Occupiers, the regulators, the politicians, the central bankers, and other multitudes of the persistently misinformed masses. Economies are crumbling around the world. Banks are failing. Prices are skyrocketing. The rich are getting richer while the masses are getting poorer. Capitalism is failing! Capitalism is failing!

Let’s get this clear. Capitalism is not failing. The mishmash economy born of macroeconomic policy designed to benefit politically connected businesses, government regulators, central bankers, and politicians auctioning stolen goods is what is failing.

Let’s be more specific. It is precisely macroeconomic policy that is failing because it cannot work. The nature of most macroeconomic policy efforts is to make interventions to generally influence outcomes – it applies a sledgehammer to drive a staple. Needless to say there is a lot of ancillary damage as a result of the action.

An economy is not a unitary thing. It is an aggregation of billions of individual personal economies. Each one of those economies will respond to an intervention in its own unique ways. The outcome of those billions of decisions is simply not predictable because every decision is based on differing motivations, resources, locations, and time preferences.

The only macroeconomic policy that won’t have negative unexpected consequences is one of non-intervention. Why is this the case? The reason is that government macroeconomic policy utilizes coercion to alter the size, number, and type of economic transactions. By doing so it shifts resources away from their most productive use in the voluntary economy to the use favored by elitist policy makers creating an imbalance that will alter many other transactions. Many economic participants will be harmed by the mandated resource allocation shift to politically favored beneficiaries.

For example, in the US government mandates that corn be processed into ethanol to be added to gasoline stock to supposedly make us more energy self-sufficient. As a practical matter it makes gasoline more expensive because it requires more energy to produce than the ethanol created.

In addition it drives up demand for corn that is normally used to feed people, cows, pigs, chickens, etc. Consequently we are seeing price rises larger than the government’s official inflation indicator in the food sector. Producers are actually rushing animals to market now because of the shortage of corn to feed their herds. Meat prices will be spiking in 2013. The reason this happens is because it increases profits at politically favored agricultural concerns like Cargill, and ADM while generating financial contributions to politicians. The damage to the consumer is ignored in favor of the producer.

We are now hearing that milk prices could double if the government doesn’t implement price controls on milk. What everyone fails to tell us is that those higher prices are mandated by federal agricultural subsidy laws dating back to the 1950s. Essentially the Feds have to legislate lower prices because they legislated higher prices earlier and are afraid to repeal those market abominations. Even in basic commodities like milk and corn we don’t have free markets in this country.

By setting interest rates artificially below the voluntary market rate the Fed is destroying capital markets in the US. All of the available capital is being sucked up by the Federal government using the near zero interest rates to subsidize Treasury borrowing. This capital is being taken from private capital markets where it would be employed to satisfy consumer needs, not political needs. The long-term application of such tools is destroying private US capital investment which will continue to undermine growth in the economy for years to come.

Far from being free, the financial markets are a maze of crony favoritism and regulation that keeps the giant politically connected firms at the top of the heap and crushed potential competitors with bailouts and humongous expenditures just to be licensed to play ball. Bailouts, money printing, market volatility, commodity shortages, inflation, and economic contraction will continue as we regulate the free economy out of existence just as the USSR did.

In short, all of the failures of capitalism that everyone points to as justifying government interventions are merely the results of prior government interference in free markets. Problems in financial markets, banking, food production, energy, transportation, etc. are all the results of the unintended consequences of government meddling in voluntary exchanges.

Now we see our economic way of life threatened as seemingly fundamental institutions are near collapse and international trade is threatened. Governments point to speculators destroying confidence in markets, but that is just to distract from their own malfeasance. Crony political corporatism is now a victim of its own success.

Only free markets and reduced government spending can slow the freight train heading for a crash. It’s not the economy that’s failing, it’s the political coercion that is collapsing. Stay away from the dying beast – it can still lash out and hurt people.